In the recent Ashmore case, the Tax Court essentially told taxpayers that if they simply can’t count, no need to waste their time pleading mercy when IRS comes calling about an obvious tax return error.
Seems Mr. Ashmore was a senior policy analyst with the Department of HUD, and held two masters degrees, one of which was in the business administration field.
His employer had engaged a third party payroll service to handle its payroll accounting and reporting. And indeed, Ashmore was issued three Forms W-2 (more than one because of a relocation, etc.) for the 2009 tax year, only two of which he reflected on his return.
Along comes the IRS, of course, assessing a tax deficiency (because of the ease with which their computers typically track and match up things like W-2 forms) and an “accuracy-related penalty” to boot.
The Internal Revenue Code does provide an “out” from imposition of the penalty in situations to which a “reasonable cause” exception applies.
The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case by case basis — the most important factor is the extent of the taxpayer’s effort to assess his proper tax liability — circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.
Taxpayers demonstrate reasonable cause when they exercise ordinary business care and prudence.
So our taxpayer buddy claims the fact that he never apparently received one of the Forms W-2 ought to get him off the hook, pointing the finger at the payroll service as ostensibly responsible for the defective reporting.
The Court didn’t buy this notion, observing that “A taxpayer’s reliance on erroneous information reported on a Form W-2 indicates reasonable cause and good faith, provided the taxpayer did not know or have reason to know that the information was incorrect.”
The Court just couldn’t swallow the suggestion that the taxpayer just somehow forgot that his true salary was some $20 grand more than the reported Forms W-2 accounted for!
Indeed, noted the Court, “We have previously held that the nonreceipt of a tax document, e.g. a Form W-2, does not excuse a taxpayer from his or her duty to report the income.”
And get this — Ashmore actually suggested that it was impossible for him to determine his exact annual wages because his earnings, which were based on Congressional appropriations, fluctuated during 2009!
Au contraire, said the Court, noting that the taxpayer’s variations in annual earnings in such an instance should have been even more of a reason that he independently double-check the numbers to his records.
Bottom line: Pay the tax, and the accuracy-related penalty — with a smile!
CONSULT YOUR TAX ADVISER – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He can be reached at 831-7288, welcomes comments at firstname.lastname@example.org, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.